The year-end for 2013 brings numerous new individual tax planning opportunities, thanks to the American Tax Payer Relied Act (ATRA) of 2013 and the Affordable Care Act (ACA). Additionally, there is the prospect of comprehensive tax reform in 2014 and even a delay to the 2014 filing season as the result of the IRS shutdown in October. This article will explore some of the best new opportunities that exist, along with traditional ones.
Capital Gains & Dividends
Beginning in 2013, the ATRA raised the top rate for dividends and capital gains from 15 percent up to 20 percent. These rates generally coincide with the new 39.6 percent top marginal income tax rate as well. This presents several opportunities.
- You might want to consider recognizing capital gains before the 2013 year-end if you have carry forward losses from 2012 to offset gains at the higher rates.
- Year-end planning should look to avoid spikes in recognized income that would push the taxpayer into the 39.6 percent/20 percent brackets if spreading the income between 2013 and 2014 can avoid this.
Surtax on Net Investment Income (NII)
Beginning in 2013, higher income taxpayers may be subject to a 3.8 percent Medicare surtax. You only are subject to the surtax if your modified adjusted gross income exceeds a certain threshold. These thresholds are:
- $250,000 for joint returns or surviving spouse
- $125,000 for married filing separately
- $200,000 single or head of household
The amount subject to the surtax is the lesser of:
- Net investment income
- The amount by which MAGI exceeds the relevant threshold
NII is more than simply capital gains and dividend income. It also includes income from a business where the taxpayer is a passive participant, and rental income earned by anyone except real estate professionals.
One-time spikes in income should be managed where possible to keep threshold income below the limits. This can be accomplished by managing Roth IRA conversions and the taxable sales of large assets.
A number of temporary tax provisions are set to expire after 2013. While it is possible that Congress may extend these provisions again, there is no guarantee. Many believe it is unlikely given the budgetary issues faced and need for increased revenue. Here is a synopsis of some of the most significant items set to expire after 2013:
- Exclusion of Cancellation of Indebtedness on a Principal Residence
- Taxpayers are allowed to exclude up to $2 million of canceled mortgage debt on a qualified primary residence.
- State and Local Sales Tax
- Currently, taxpayers have the option to deduct state and local sales taxes instead of state and local income taxes on Schedule A.
- IRA Distributions to Charity
- Taxpayers over the age of 70½ are currently allowed to distribute as much as $100,000 to public charities tax free. This can occur as an alternative to receiving the distributions as RMDs, and to paying taxes on that amount and then taking an itemized deduction for the net amount given to charity.
All of these provisions and a number of others will no longer apply beginning in 2014.
Traditional Planning Opportunities and Life Events
Much of our current tax code is written to encourage particular behaviors. As a result, the best planning opportunities often do not come from changes in tax law but from changes in your personal situation. Consider the following list of life events and make sure your accountant is aware of them to ensure you receive each and every deduction and credit available.
- Changes in your filing status – marriage (including same-sex), divorce or death
- Birth of a new child
- Significant medical expenses
- College tuition and related expenses
- Recent or anticipated large inheritances
- Bankruptcy or discharge of indebtedness
- Changes in dependents – older children moving out or graduating college
- Employment changes and related relocation
Planning can only be done if you act before year-end. If you have your own business, are a higher income taxpayer or experienced any significant life events, let us know so we can work together to optimize your personal tax picture before it is too late to plan.